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Accountant from greenwell springs, Louisiana

from Ellicott City, Maryland

replied about 9 years ago

Yup, flipping houses is equivalent to buying/selling any other commodity, and you will be subject to self-employment tax on the income you earn personally.

Of course, there are ways to use business entities to potentially shield yourself from some of those taxes (or all of those taxes for some finite period of time), so if you're planning to get into the business, talk to a CPA and/or tax strategist...

Accountant from greenwell springs, Louisiana

Originally posted by J Scott:Yup, flipping houses is equivalent to buying/selling any other commodity, and you will be subject to self-employment tax on the income you earn personally.

Of course, there are ways to use business entities to potentially shield yourself from some of those taxes (or all of those taxes for some finite period of time), so if you're planning to get into the business, talk to a CPA and/or tax strategist...

what if all the money is earned in an LLC?

and what if I only do a few a year? and it's not something i am doing for a living?

this is a huge deal. Why would anyone flip houses when you have to pay 50% in income & Self employment taxes?

from Ellicott City, Maryland

replied about 9 years ago

Originally posted by Stephen N.:what if all the money is earned in an LLC?

Depending on their tax election, most of the time any income generated by an LLC flows through the LLC directly to the shareholders/owners. In other words, the LLC generally doesn't recognize income itself...the owners generally must take responsibility for *all* it.

So, if you own 50% of the LLC, then 50% of the income is yours, and you will owe tax on that income...

Notice I said "generally"...there are ways you can elect to have your LLC taxed so that this may not be the case (though it might result in more tax, depending on your specific situation).

and what if I only do a few a year? and it's not something i am doing for a living?

In that case, you'll pay less in taxes. In fact, if you don't do any flips, you'll pay *nothing* in taxes... :D

As others have said, paying taxes is a good sign. And, more importantly, like I mentioned above, if you consult a good CPA or tax strategist, they can help you structure your business in a way that you pay less in tax and/or allow you to postpone paying taxes.

For example, if you have an LLC taxed as an S-Corp, you can get around some of the SE tax if you're income is within a certain range...

this is a huge deal. Why would anyone flip houses when you have to pay 50% in income & Self employment taxes?

Because it's still much better than a lot of other options where you don't pay SE tax... :wink:

from Loveland, CO

replied about 9 years ago

The OP wrote; "Why would anyone flip houses when you have to pay 50% in income & Self employment taxes?"

50%? You need to turn off the right wing radio. IIRC the TOP (marginal!) RATE is about 35% so even if you made $100,000 or so and it was your only source of income you'd probably pay about $15,000, which is 15%, NOT 50%.

Accountant from greenwell springs, Louisiana

replied about 9 years ago

Originally posted by Frank Adams:The OP wrote; "Why would anyone flip houses when you have to pay 50% in income & Self employment taxes?"

50%? You need to turn off the right wing radio. IIRC the TOP (marginal!) RATE is about 35% so even if you made $100,000 or so and it was your only source of income you'd probably pay about $15,000, which is 15%, NOT 50%.

You don't pay FICA and Medicare on this income.

Frank

i'll stop listening to right wing radio if you promise to do a little more research on the tax code.

If I have a full time job that puts me in the 28% tax bracket that means every additional dollar I make above my salary will be taxed at a 28% fed tax rate. Add to that a 6% state tax rate and 15.3% self employment tax rate and you get to 50%.

Self employment tax is the same thing as FICA and medicare, essentially.

Real Estate Investor from Dallas, Texas

Form an LLC. Take ownership of your properties in your LLC. File the paperwork with the IRS so your LLC is taxed as an S Corp. This allows flow through.

Pay yourself a minimal salary. I pay myself 12k a year. You will have to pay SS on this income.

Then with the rest of the income the LLC makes just take a distribution. These distributions can't be regular payments and they shouldn't be the same amount. This will look like a salary and you will chance an audit. Just make distributions per flip or whatever. That way you will always have super random amounts, at random times.

Once again consider my information useless and seek out a CPA. I could be speaking gibberish.

Real Estate Investor from Baltimore, Maryland

replied about 9 years ago

Michael's suggestion is the same exact approach that John Edwards used himself. A couple tens of thousands in income and hundred of thousands in distributions... I guess if it is good enough for that pretty boy it is more then good enough for us!

from Loveland, CO

replied about 9 years ago

Stephen wrote; "If I have a full time job that puts me in the 28% tax bracket that means every additional dollar I make above my salary will be taxed at a 28% fed tax rate. Add to that a 6% state tax rate and 15.3% self employment tax rate and you get to 50%."

True, except the OP didn't ask about a JOB, he asked about flipping.

On 100,000 of income that tax (married filing jointly) is about $17,000. I realize the 28% marginal rate kicks in, (don't recall at what taxable income rate. It's only about the top 2% or so of earners who are paying that higher rate.

Regardless of how much state tax you pay you do NOT PAY FICA on flip income, nor rental income for that matter, so you're not approaching the 50% hit. Unless my CPAs have been doing it WRONG for the last 32 years.

Investor from St. Louis, Missouri

replied about 9 years ago

Well, I hope your right Frank. My CPA claims I don't have to pay Payroll taxes on my flip income since it is not my primary employment. His take is that if I would quit my day job and do flipping full time I would then be responsible for payroll taxes on whatever income I paid myself from the company but now all flip income is treated as short term capitol gains.

Accountant from greenwell springs, Louisiana

replied about 9 years ago

Originally posted by Frank Adams:

Regardless of how much state tax you pay you do NOT PAY FICA on flip income, nor rental income for that matter, so you're not approaching the 50% hit. Unless my CPAs have been doing it WRONG for the last 32 years.

from Ellicott City, Maryland

replied about 9 years ago

Originally posted by Frank Adams:

Regardless of how much state tax you pay you do NOT PAY FICA on flip income, nor rental income for that matter, so you're not approaching the 50% hit. Unless my CPAs have been doing it WRONG for the last 32 years.

If this is really the case, it's quite possible that your CPA has been doing it wrong. Because you *are* subject to FICA taxes on self-employment income (either as a sole proprietor or as a salaried employee of a company you own).

Most likely, there's something you're missing. For example, if you make over $106K in your full-time job, all your FICA is coming from there...and therefore you won't be on the hook for FICA for the additional income you earn from flipping. Or if your accountant is having it paid all to you as a dividend instead of salary (which wouldn't please the IRS at all).

But, that said, any self-employment income (including ordinary income from flipping houses) is subject to FICA up to the IRS limits.

I'm not a tax professional, but this is pretty basic tax stuff...you should probably have a chat with your CPA just to be safe...

from Loveland, CO

replied about 9 years ago

J Scott wrote; "if this is really the case, it's quite possible that your CPA has been doing it wrong. Because you *are* subject to FICA taxes on self-employment income (either as a sole proprietor or as a salaried employee of a company you own)."

Well, it's 3 CPAs over the last 30 years, and I'm NOT a sole propietor nor a salaried employee of a company I own. I'm also NOT a dealer.

"Most likely, there's something you're missing."

Or NOT. Unless the IRS auditors are missing it as well.

"But, that said, any self-employment income (including ordinary income from flipping houses) is subject to FICA up to the IRS limits."

from Ellicott City, Maryland

Originally posted by Frank Adams:I'm NOT a sole propietor nor a salaried employee of a company I own.

If you're not a sole proprietor and your not getting paid as an employee of your own company, how exactly are you paying yourself?

I'm also NOT a dealer.

From the IRS perspective, it's not whether you're a dealer or not, it's whether the individual transactions that you are completing are considered dealer-type transactions. For example, you can sell 10 houses in a year, and 5 can qualify as dealer status and 5 can qualify as not.

That would be true if it were self-employment income, but it's NOT.

So again, how are you getting paid?

Here is the definition of self employment by the IRS:

"You are self-employed if any of the following apply to you.

* You carry on a trade or business as a sole proprietor or an independent contractor.
* You are a member of a partnership that carries on a trade or business.
* You are otherwise in business for yourself."

I'm not doubting you, I'm just trying to understand. If there is a way I can get around SE tax legally, I'd love to know what it is...

from Ellicott City, Maryland

replied about 9 years ago

Originally posted by Mike V:Well, I hope your right Frank. My CPA claims I don't have to pay Payroll taxes on my flip income since it is not my primary employment. His take is that if I would quit my day job and do flipping full time I would then be responsible for payroll taxes on whatever income I paid myself from the company but now all flip income is treated as short term capitol gains.

Mike,

First, the IRS is very clear about the fact that just because it's a part-time business doesn't mean that the income is exempt from SE tax:

http://www.irs.gov/businesses/small/article/0,,id=98846,00.html

Second, if you purchase real estate with the primary intent of reselling it for a profit, it is not an investment, and therefore your profits are considered business income and not capital gains...

My guess is that both your and Frank's CPAs are doing the same thing -- treating the RE purchases as investments even though they clearly are not (since you intend to flip them). They instead are just inventory.

This is pretty easy to get away with until you get audited, as a pattern of flipping makes it difficult to argue that you intended to hold all the properties you have purchased.

from Fairfield, Illinois

replied over 8 years ago

Stephen....Your question is one that has been driving me crazy for months. I'm retired and in 2007 bought a foreclosure and sold 7 months later at a profit - reporting it as a short term capital gain. It was just an investment in my thinking. Then later heard about the issue of the 15.3% Self Employment Tax (SET). [How is it that I can buy a stock or a gold coin one day and sell it the next and it's a capital gain but buying and selling a house isn't?] Anyway, so far, no audit or IRS letter.

I wanted to continue flipping as a profitable "hobby" but was discouraged because of the SET issue until I saw a foreclosure I could not pass up this year. Bought and sold it in 3 months at a nice profit but now how do I report it for taxes!! I've wondered if I should have rented it for a year and then sold since the renting of it would probably have eliminated any SET risk. Any thoughts on this?

I've enjoyed reading the comments posted here and the differing opinions. Would be helpful to hear from someone who has been audited about the issue. Right now I guess I'll report my profit as a short term capital gain and take my chances. I suppose if I want to continue flipping I'm going to have to talk to a CPA and follow that advice.

from Ellicott City, Maryland

replied over 8 years ago

Originally posted by Lorenzo Baranos:Then later heard about the issue of the 15.3% Self Employment Tax (SET). [How is it that I can buy a stock or a gold coin one day and sell it the next and it's a capital gain but buying and selling a house isn't?]

The reason is that when you trade a stock, the IRS considers that trade to be an investment. But when you flip a house, the IRS considers the transaction to be no different than retailing any other product (in other words, buying and selling a house is no different than buying and selling a pair of shoes).

From the IRS' perspective, you are running a business that buys and sells stuff, and therefore you are on the hook for SET.

Account Closed

replied over 8 years ago

Originally posted by J Scott:

Originally posted by Frank Adams:

Regardless of how much state tax you pay you do NOT PAY FICA on flip income, nor rental income for that matter, so you're not approaching the 50% hit. Unless my CPAs have been doing it WRONG for the last 32 years.

If this is really the case, it's quite possible that your CPA has been doing it wrong. Because you *are* subject to FICA taxes on self-employment income (either as a sole proprietor or as a salaried employee of a company you own).

Most likely, there's something you're missing. For example, if you make over $106K in your full-time job, all your FICA is coming from there...and therefore you won't be on the hook for FICA for the additional income you earn from flipping. Or if your accountant is having it paid all to you as a dividend instead of salary (which wouldn't please the IRS at all).

But, that said, any self-employment income (including ordinary income from flipping houses) is subject to FICA up to the IRS limits.

I'm not a tax professional, but this is pretty basic tax stuff...you should probably have a chat with your CPA just to be safe...

There are a lot of CPAs that get this wrong. Primarily they don't understand that there are several classifications of RE investors. Many CPAs are generalists. Another industry CPAs often get wrong in is with wineries. It is necessary to know more than basic accounting and tax rules. Some industries have special rules and considerations.

If your flipping properties you are generally speaking creating ordinary income and it will be taxed as such and self employment tax applies. If your CPA isn't treating it properly then lets hope you don't get audited. A substantial under reporting of income carries a 20% penalty and the other penalties and interest apply. Generally speaking the IRS will open up other tax years when they see substantial problems.

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